How to Change Your Money Mindset Next Year, According to Science

By Susan Shain

December 31, 2018

This year you’re going to do things differently. That fancy cappuccino you buy every day? You’ll make coffee at home. That no-fee bank account you said you’d sign up for? This is the year you’re going to open it.

If all goes according to plan, you’ll accomplish these financial goals, as well as all the others you’ve set over and over, year after year. Yet, have you ever wondered why, despite your good intentions, you haven’t accomplished them already?

Perhaps it’s because you haven’t addressed the roots of your financial behavior: your money mindset. That’s right: What you believe about money has a powerful effect on what you do with your money. With that in mind, here’s how to make changes that last in the upcoming new year.

Accept Your Starting Point

Your money mindset has been brewing for a long, long time.

“We all develop and suffer from certain money beliefs, biases, and behaviors that are developed based on our family history and how we approach money decisions,” says Victor Ricciardi, a finance professor at Goucher College and co-editor of “Investor Behavior” and “Financial Behavior.”

It should come as no surprise that if you’ve had positive experiences with money, you’re more likely to have better money habits, says Ricciardo. And if you’ve had negative experiences, chances are you have poor habits.

So, consider how the past may have shaped your current mindset, then release yourself from blame — and accept that the only thing you can control now is the present. That, in turn, will help shape your future.

Recognize Your Biases

Cognitive biases are a core part of your beliefs, and Ricciardi says behavioral finance research has revealed several common ones. Take a look at these two beliefs that may affect your biases:

Representativeness: This theory, according to Ricciardi, posits we have an “automatic inclination to make judgments based on the similarity of items, or predict future uncertain events by taking a small portion of data and drawing a holistic conclusion.” When it comes to your money, that might mean assuming one tech stock is a good investment because other tech stocks have performed well. Or it might mean avoiding stocks entirely because the market crashed in 2008.

Anchoring: Ricciardi says this involves “selecting an initial reference point and slowly adjusting to arrive at a final judgment.” Say you see a pair of jeans for $300, and then later find those same pants marked down to $150. Whether or not $150 is a good price for jeans, you might think they’re a bargain simply because of the original (anchor) price.

“We need to make an individual effort to understand our biases and how these mistakes might result in poor investment outcomes,” explains Ricciardi.

Are you scared of the market? Are you addicted to the sales rack? Analyze the biases that might be contributing to those behaviors, and then do your best to address them.

Explore Your Beliefs

When determining which biases you hold, it also helps to reflect on the past. Ricciardi recommends recording how you’ve responded to previous financial events, and then considering which biases might have shaped your reaction.

You should also write down your current money beliefs by answering questions like:

What did your childhood teach you about money?

How does spending money make you feel? How about earning money?

What do you think about being “rich”? What about being “poor”?

How do you wish you felt about money?

If you want to keep going, financial planner and success coach Natalie Bacon offers more thought-provoking suggestions on her blog, including this one from life coach Brooke Castillo: “How would you spend $1,000,000… if you received it right now? Would you tell people? Why or why not? What would you make this money mean? What would other people make it mean?”

Before changing your money mindset, you’ll need to fully understand it — and these questions will help you uncover the truth.

Choose Abundance Over Scarcity

What did your beliefs reveal? If you’re like many people who struggle with money, you may discover that you focus on scarcity rather than abundance.

“A person with a scarcity mindset believes there is a finite amount of money to go around. A person with an abundance mindset believes there is plenty for everyone,” explains financial therapist Lindsay Bryan-Podvin.

To change your mindset from scarcity to abundance, you’ll need to consciously reframe your everyday thoughts. Here are some examples of how to do this, according to Bryan-Podvin:

“$50 isn’t going to save me in a crisis, so there’s no point in starting an emergency fund” → “While $50 probably won’t help a ton in a crisis, by starting to save I’m investing in my future safety.”

“I could die tomorrow, so why wouldn’t I book this weeklong excursion through South America?” → “That South American trip has been on my bucket list forever! I bet I can start saving money and stocking up on airline miles now, so I’ll be able to go in a year or two.”

You can also practice money affirmations. A few of Bryan-Podvin’s favorites are: “I release all negative energy over money,” “I am aligned with the energy of abundance,” and “Money expands my life’s opportunities and experiences.”

Educate Yourself

Regardless of what you may think right now, you are not doomed to be “bad with money.”

Vicki Bogan, who teaches finance at Cornell University and directs The Institute for Behavioral and Household Finance, says this all-too-common belief can usually be attributed to insufficient education.

“People who lack financial literacy often become scared or emotional about financial decisions and as a result do not do anything to actively manage their finances,” she says.

To combat this, she recommends learning about common topics like budgeting, money management, and financial planning.

Bryan-Podvin agrees. Rather than making a blanket statement about your financial ability, she suggests getting specific about what you’re struggling with — whether it’s investing in retirement or understanding your taxes — and then educating yourself in those areas.

“We aren’t taught about money, and yet we’re expected to know how to create a spending plan, set aside money for retirement, and save for children’s futures. Often, going over personal finance definitions and concepts can help,” she says.

Determine Your Values

Even with all the education in the world, you’ll never stick to your goals unless you figure out why you’re working toward them in the first place.

“Saying ‘I want to save’ because a blogger said it was important doesn’t do much,” explains Bryan-Podvin. Likewise, “Thinking about opening up a Roth IRA is meaningless if you don’t have a why behind it,” she says.

So, before taking the next steps toward financial freedom, ask yourself what you value. If it’s health, for example, you’d probably be fulfilled by buying fresh produce instead of fast food, or rock climbing shoes instead of high heels. If you value adventure, you’ll feel more fulfilled saving for a big trip than racking up big bar tabs.

“Once a person has their values figured out, creating a plan that sticks becomes so much easier,” says Bryan-Podvin.

Create a Financial Plan

One essential part of being human is making mistakes. And when you inevitably slip up, having a financial plan will help you stay on track. So think about how you want your life to look, and how money plays a role.

Because you’ve taken the time to understand your biases, beliefs, and values, you’ll be able to develop a plan that isn’t like everyone else’s — a plan that makes sense for you. Maybe you want to become a homeowner, retire early, or stop living paycheck to paycheck. Whatever it is, Ricciardi says creating a long-term plan will help you make better financial judgments.

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